$1.5 billion KPERS bond proposal advances in Legislature

Topeka  Legislators on Friday moved toward issuing $1.5 billion in bonds in a gamble to shore up the state pension system.

The Senate Ways and Means Committee recommended approval of a bill that would allow the issuance of the bonds at a maximum interest rate of 4 percent.

The House has already adopted House Bill 2403, which would set the maximum interest rate of the pension obligation bonds at 5 percent. The differences in the two bills will likely be negotiated in a House-Senate conference committee.

Supporters of the plan say the state can borrow money at 5 percent or 4 percent or lower, and then invest those funds, hopefully getting a higher rate on investment, which historically has been 8 percent.

The profit would then be plowed back into the Kansas Public Employee Retirement System to help fill a gap between anticipated revenues and long-term promised benefits to teachers and government workers.

"This is a good idea for the state," said State Treasurer Ron Estes. "The net cost to the taxpayer will be less over the next 20 years if we do issue bonds."

Some legislators said they thought the plan needed further analysis.

"We are taking action long before we have the information we need to make an educated decision on this," said Sen. Laura Kelly, D-Topeka.

If getting an 8% return on investment is as easy as these guys seem to think, why would anyone buy their bond that pays 4%? In other words, why would I buy their bond paying 4% instead of just investing my money in whatever they plan on investing it it to get 8%? This scheme sounds a little bit harebrained.

It's that easy if you're able to invest long-term. If you are able to leave money in the stock market for 50 years, then historical data indicates that you will see at least 8% a year.

The problem? If you need to spend that money in the short term, you may find yourself withdrawing it at a time when the market is down and end up with substantially less money.

This is why retirement portfolios shift toward bonds as you age - as you approach retirement, you're counting on that money being there at the moment of your retirement. Whether the market is up or down, you need to have it there and you will be accessing it. You don't have time to wait on historical averages.

The problem with government entities is that they're rarely able to patiently allow large piles of money to sit untouched. It will be tempting for them to assign restrictions on what it can be invested in (special interests, KS companies, etc) instead of the market as a whole. It will be tempting to "borrow" from it to fund other projects (losing the 8%). Then they lose their 8% annualized average return, because that average relies on long-term investment in a diversified stock portfolio.

I thought they were going to use some other revenue, from gambling perhaps, to help shore up KPERS?

While you can get higher returns than 4-5% in the stock market, that's generally riskier and more volatile, and long term averages don't take into account short term losses. What happens if they lose a bunch of money in the market?

If you're invested over a long time, you will see the long term average with your portfolio. But, you can easily lose a lot in the short term, and if you can't leave the money in for the long term, that's a problem.

So, for the state, it may not make sense to invest in the market, if they need the money from projected long term average returns in the short term - they may very well not see those in that time period.

Better?

For example, if you take 4 years including the one in which the market tanked recently, a total stock market index fund like VTSMX, which is the most diversified fund you could get, lost 37.04% in one year, and if you average the returns for the 4 years starting with that year, they average out to 2.42%/yr.

If the state is taking 8% a year to cover KPERS, they'd be losing money each year.

Didn't we do this to the tune of $500 million when Sebelius was Governor. I recall $500 million went to KPERS and another $500 million was for KDOT's transportation plan. As I remember there was no principle paid on either bond issue for 5 years. That was convenient for her as she would be long gone before the big bill came due.

Pensions are no more than deferred compensation. These dumb bastards now are planning to borrow money to meet what is essentially a payroll expense. That's like eating the seed grain. They should have fixed kpers, which is a legal and contractual obligation BEFORE slashing taxes. DUMB BASTARDS...